The Fed's Big Mistake Was Inflating, Not Being Too Slow To Ease

Sep 18, 2024

The Fed was misguided with its QE effort of April 2020 - May 2022. QE has been an abomination since the initial QE program of 2009, which was to be a “one-off” program. QT was weak by comparison.
The Fed was misguided with its various equity workarounds that enabled it to skirt its mandate (buying equities via ETFs during its “COVID response”).
The Fed was wrong to participate in corporate debt deals such as Apple’s credit facility back in 2021.
Bailouts at scale. The Fed was wrong to bail out the banks in March 2023 with its BTFP, just as it was wrong to execute bailouts in conjunction with Treasury during the GFC of 2008-09.
Powell caved too soon. The Fed was wrong to begin easing monetary policy in Q4 2023.
QT was weak. The Fed was wrong to not be more aggressive with its QT program as QT’s pace paled in comparison to the pace of the Fed’s most recent QE effort.

So, what now? How much should the Fed cut Fed Funds? The answer is that it is difficult for me to say given that I believe the Fed’s arbitrary moving of its Fed Funds rate is Government interventionism, which is an awful truth. The Fed should not set short rates. The Fed should only be concerned with maintaining a stable money supply.
What the Fed ought to do now is pare back its balance sheet in order to remove the excess assets accumulated during February 2020- April 2022 when the Fed grew its balance sheet from $4 trillion to $9 trillion (peak in April 2022).
I would like to see the Fed’s balance sheet back around $5 trillion. Sound harsh? Nobody complained on the way up while the Fed was devaluing the Dollar at a record pace in the name of supporting Treasury’s irresponsible spending.
Treasury and the Fed will eventually take their medicine, it is just a question of when. The sooner each acts responsibly (from a fiscal and monetary perspective), the better. The longer Treasury and the Fed kick the can down the road, the more painful the economic and monetary recovery process will be.
It will be fascinating if during the Fed’s rate easing process long rates climb as short rates come in. Keep an eye on the 10-year Treasury over the next 6 months.

My Fed prediction for 2025: Powell will be gone by February 2025 and will be replaced by an even bigger political hack. In the meantime, Powell’s rate-lowering actions will save the big banks and their underwater fixed income investment securities.

Bank of America (BAC) CEO Brian Moynihan needs to send Powell a “Thank You” note complete with free rounds of golf, free range balls and free valet parking for life.